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Muthoot Finance Ltd IPO Closes today…will give strong gains on Listing…Problem is a Poor Allotment

I have already posed in TAP GAP an Equity Poser 4/11 on whether Muthoot Finace IPO is worth investing in at Rs 175?

Responses have been terrific in content and I thank all those so far who have taken the trouble to try and win the gauravblog hamper and send in their responses !…..those who have not can do so by midnight tonight for a chance to win…. those who have alreadfy can send in another response too !

Perhaps all of you can get some guidance from the Scriptech Scan Muthoot Finance IPO Template send to Clients by me on April 19,2011 and reproduced below……TAP GAP 4/11 Winner for the hamper will be selected by me tomorrow…all the best 

For Inspiring Investment Insight into Indian Equity check out





Size of Issue at Top end : Rs 901 Crs


Think Loan Against Gold…Think MFL….Two Rating Agencies,CRISIL and ICRA have given MFL a 4/5 IPO Rating indicating above average fundamentals with good growth

Promoter Pedigree

This is the third generation of Muthoots that are running MFL….and they too are either past retirment age or approaching it !

The First Generation, Ninan Nathai Muthoot set up a Trading Business in 1887…the Second Generation,M George Muthoot  set up the Gold Business in 1939…and the Third Generation of Four Muthoots have scaled up fast in the last three years and are taking MFL Public….The Four Muthoots are the Wholetime Directors and constitute 50% of the Board  which also has four Independent Directors

The Group has a host of companies across a host of businesses…from FM Radio Broadcating to Real Estate and Resorts

A Harder look at Promoter Intent & Mindset

Abetting in Private Equity Placement at Differential Pricing in the same month too ! 

But MFL is literally and figuratively the GOLD mine.Owned 100% by the Muthoots,the dilution to 93 % took place in the last year to Private Equity Players at Share Prices ranging from Rs 123 to Rs 173.50….including to Kotak Private Equity Fund and Kotak Investment Advisors….Kotak Bank too is a major financier of MFL receivables and Kotak Mahindra Capital is lead managing the issue.

Let’s  not start a debate here on Conflict of Interest and Investor Protection on Pricing and on who’s really steering the Ship here…the Promoters or the Private Equity Players and the Lead Manager !

But it’s amusing how Pricing can change significantly in the same month of preferential allotment…On September 8,2010  two Kotak entities invested at Rs 133…a fortnight later the same month on September  23,2010 Matrix Partners India Investment LLC comes in again at Rs 173.50 (earlier was at Rs 123 two months earlier on July 23,2010) this time with Wellcome Trust Ltd too at the same price….Clearly Opportunistic and Vested Interests at play here……… 

Reward Self damn well but not the key employees

What catches the eye is this….Every one of the Four Muthoot Directors are currently getting this from the company,while the Top Employees are paid a pittance…top Finance Guy got just  Rs 10 lakhs for the whole year !…while MFL remained private it was nobody’s concern really but now with it going public there are a few eyebrows surely that will be raised 

  • Basic Salary of Rs 20 lakhs every month with increments upto 25% in a year at the discretion of the Board
  • Special Allowance of Rs 20 lakhs a month
  • All Expenses paid for Housing,Travel,Telephones etc
  • Incentive of Rs 1.8 crs or 1% of the Net Profit before taxes and before applying this incentive whichever is higher to be paid at quarterly intervals….FY 11 should close with EBT of close to Rs 600 crs…so that’s Rs 6 crores for each Director as incentive….November 30,2010 results for eight months already shows Rs 12.8 crs debited to Directors Remuneration….  FY 12 should see an EBT of over Rs 800 crs…so that’s Rs 8 crs that will be paid out as Incentive to each
In addition they shall get a royalty from MFL for using the Muthoot Brand Name…more of this below
Top Key Employees of a 15500 + strong workforce get Salary packages ranging from Rs 5 lakhs to Rs 10 lakhs for the full year !…something is terribly skewed here…you do not build an Empire simply by rewarding yourselves alone !…If this issue is not addressed,you might soon see a Labour Union in MFL and a high attrition rate…this is a huge risk
Muthoot Trademark is owned by MFL but is intented to be reassigned to the Promoters by a rectification process that has already commenced
Muthoot Trademark and Logo is owned by MFL…it’s an Intangible Asset…a Brand that has great Value…as rectiification process for reassigning it to Muthoots is the method adopted,no valuation has been done…when this process is completed the Muthoots would grant MFL a non exclusive license to use this Brand for a royalty fee of 1% of gross income but not more than 3% of profit before tax (after charging the royalty) and managerial remuneration payable…this brand should have a value of several hundred crores atleast if not over a thousand crores at this time…Promoters would own this and no longer MFLMFL would have to pay for using it though !   
Liquidating some part of the Promoter Holding to Private Investors
On September 21,2010 Promoters have offoaded 3202128 shares at Rs 173.50 to The Wellcome Trust Ltd of UK to cash in Rs 55.55 crs…MFL also issued 1761206 Fresh shares at the same price to The Wellcome Trust Ltd ,UK on September 23,2010
The IPO & Pre IPO Placements
MFL is offering 5.15 cr Equity shares of Face Value Rs 10 in the Bookbuilding Price band of Rs 160 to Rs 175
Equity is currently Rs 320 crs and will move to Rs 372 crs Post IPO of which the Muthoots will hold 80.12 % .Networth which is estimated to be Rs 1251 crs at March 31,2011 will move to Rs 2142 crs with this Rs 901 crs Issue at top end price of Rs 175
It has just announced that it has successfully placed,the maximum allowed, 15 % of Shares on Offer to Eleven cornerstone Anchor Investors at Rs 170.These include Citigroup Global Markets Mauritius, Abu Dhabi Investment Authority, Goldman Sachs India Fund and Baring India Private Equity Fund 
The Issue will be heavily subscribed…The Qualified Institutional Body  Portion is 50% or 25750000 Shares,the Non Institution or High Networth Investors Portion is 15% or 7725000 shares while Retail Investors can apply for 35% of the Issue or 18025000 shares
The Retail Portion needs Rs 315 crs for subscription at Rs 175…Minimum Application is for 40 shares and then in multiples thereof.It is likely to attract over Rs 6000 crs…so even if you put in the maximum application for Rs 196000 (1120 * Rs 175),you’ll probably be allotted just 50 shares or thereabouts…If it lists at Rs 225 as expected in May 2011,the gains of Rs 50+ may look super at 30% absolute but it translates to just Rs 2500 !…on an application of Rs 196000 !…Annualised gains would be between 18% to 24%….some ponderables though !….may get a lower allotment than even 50 shares if retail portion is oversubscribed even more heavily than 20 times….may get a lower or higher price than Rs 225 on listing 
This is the Problem that Retail Investors face in a relatively Good Issue…Poor Allotments and insignificant Gains….this IPO will make you money…but not as much as it does the Promoters and the Private Equity Players….the Old Game being played out by a crafty Lead Manager !
Nevertheless,do go ahead and apply…monies otherwise are sitting earning far less in your Bank Accounts
Oh ! and don’t grudge the Private Equity Players who have cornered shares in preferential allotments …they carry a 14 month lock in  as per Shareholders Agreements or longer as per SEBI IPO Rules…Anchor Investors who have just received firm allotments at discretion of Promoters as advised and ‘controlled’ by Lead Managers have only a 30 days lock in…None of them get any Bonus Issue benefit…that was cleaned up by the Promoters,and they had the right to do so too, in two liberal issues of 7:1 on October 21,2008 and 36:7 on August 29,2009 after they had invested fresh Equity in 2006 and 2008 at Rs 250 per share 
MFL : Peer Valuations

Two Leading ‘Financing against Gold’ Companies



 in Rs

Book Value in Rs



 Total Income

 March 31,2011

Rs Crs


Net Profit

March 31,2011

Rs Crs


Muthoot Finance


 58 *






Manappuram General Finance







Book Value and EPS adjusted for  FY 11 Profit Estimates * Post IPO


MFL is the Market Leader

There is simply no doubt MFL is the Market Leader in LAG Segment…Impressive…Have a Look

Market Leaders in ‘Loan Against Gold’ Financing Segment

Source : IMaCS Report updated 2010



FY 10 Loan Book

( Rs Crs)

% of Market Share


Muthoot Finance Ltd




Indian Overseas Bank




Indian Bank




Manappuram Finance




South Indian Bank




Muthoot Fincorp




State Bank of Travancore




Andhra Bank




Federal Bank



As of November 30,2010,The Loan Book of MFL has climbed to Rs 13004 crs…It’s got a bigger share than even the big Southern Banks…and No ,Muthoot Fincorp is not a related company…so a potential and clear confusion and clash of Brand recall exists 

Interest Dynamics of MFL for the Eight Months at November 30,2011

Interest Income =>

Rs 1289 crs

Charged to Customer

Average 19.94 %

Interest Expense=>

Rs 583 crs

Cost of Funds


Now that’s a fabulous mark up of 120% on Cost of Funds !…MFL simply plays the Numbers game with such  a great Net Interest Margin…It had 4.1 million accounts across 20 states (predominantly in the South),Delhi and Four Union Territories being serviced by 2263 Branches…it held 97.6 Tonnes of Gold as collateral…that’s worth over Rs 20000 crs against a Retail Loan Book of Rs 13004 crs.The Average Loan was Rs 31553 and Interest earned was an average of 1.67% every month….the Loan Book was funded by Muthoot Gold Bonds outstanding at Rs 3364 crs + Loans from Banks and Financial Institutions of Rs 4709 crs + Selling Receivables under bilateral assignments to banks of Rs 3246 crs….  

Network of Branches

As of February 28,2011 the branches were 2611,the accounts had swelled past4.5 million,the Employees were 15664 that served an average of 67953 customers every day in February 2011…there is no Labour Union…yet

Except 14 Branches which are owned by MFL,all Branches are rented or leased.It takes an average of Four to Six Weeks and Rs Five lakhs to Rs Ten Lakhs to set up a branch…each requires a Strong Room to hold the Gold Collateral plus a Burglar Alarm and Security Personnel Arrangements at high risk branches…Eight Months figures at November 30,2010 show the average cost of setting up a branch was Rs 6.5 lakhs

Three years ago as on March 31,2008 there were 2999 Employees…..the surge is therefore relatively recent as MFL acheived a 74% CAGR in AUM over the past three years

Customer Profile and Loan Criteria 

Customers are from the lower and middle income groups….small businessmen,traders,farmers or salaried people who prefer quick cash disbursments as a Loan against gold jewellery…MFL boasts of disbursing Rs 20000 within five minutes of a customer entering the Branch as they have trained and experienced Gold Appraisers at all branches….they receive training at MFL centres in Delhi and Kochi and regional centres at Bengaluru,Hyderabad and Chennai…Creditworthiness of the Customer  is not a criteria for lending as Defaults are settled by selling of the collateral gold…Merely Identity Proof and a Branch Webcam taken photograph suffice….A pledge and Loan agreement is generated for signing.Interest is payable only with the return of Principal…loans are of 12 month duration but most settle between 90 days to 180 days…Lending is at a Fixed rate per gram of Gold which is lower than the Market Rate as a further caution….Moreover it is against 60% to 90% of the Gold content appraised in the jewellery…that’s a further caution taken by MFL.The Gold is secured in a Polythene bag alongwith the documents and a tamper proof seal is applied and the bag stored away in the Strong Room   




Eight Months

 November 30,2010

 FY 11 & Post IPO


 FY 12


Interest Income (Rs crs)




PAT (Rs Crs)




EPS (Rs)




Equity of FV Rs 10 (Rs Crs)




Reserves (Rs Crs)




Networth (Rs Crs)




 Book Value (Rs)




P/E at Rs 175




P/BV at Rs 175




Growth Propsects Good for MFL

Last three years MFL has achieved a incredible CAGR of 74%….With Gold Prices expected to continue northwards over the next few years,the health of the ‘Loan against Gold’ Industry should get a richer shade of pink

Estimated Indian Stock is 18000 tons of Gold,about a tenth of the global stock…every year 700+ tons add to it…80 % for jewellery fabrication….4.7% of the stock is pledged of which 75% is with the unorganised sector of moneylenders and pawnbrokers…increasingly more and more are now inclined to pledge Gold jewellery for short term loans and the penetration is bound to increase and in the year ahead it is likely that 8% to 10% of the gold stock would be pledged

MFL as a Systematically Important Non Deposit NBFC is leveraging well on this scalable opportunity that is presenting itself to develop the organised market and increase market share and penetration.From 97.6 Tons of Gold it held at November 30,2010 worth over Rs 20000 crs,it is expected that MFL will soon be able to double its business from the retail loan book of Rs 13004 crs on the same date….This IPO of Rs 901 crs will give added headwind to increase the Assets Under Management and lend more while maintaining healthy Capital Adequacy Ratios,above levels prescribed by RBI     

Some Risks

What’s the potential downside  ? It’s the Interest Spread…The current double digit spread will surely be impacted going forward on account of the following

  • On February 2,2011,RBI issued a notification that clarified that Banks cannot consider Loan against Gold sourced by NBFCs as agricultural advances.This would also apply to their Investment in securitised pools or portfolios purchased through assignment of ‘loan against gold jewellery receivables’ originated by NBFCs….37% of MFL’s assets as of December 31,2010 were funded by banking limits classified as agricultural lending….going forward it would have to be funded from higher cost non agricultural lending…Interest Speads should be impacted by 0.5% to 1 % on this account  
  • 23 % of MFL’s funding came through the assignment route as of September 30,2010.It shot up to 29% at November 30,2010.This door may close partially or even fully if RBI final guidelines on securitisation are applied to bilateral assignments too….these guidelines require that Loans should have a 24 month minimum contractual maturity and issuers need to hold it for a minimum period of 12 months before offering it for securitisation…currently MFL Loans have a maturity of 12 months…MFL would the have to seek bank borrowing at a higher rate 
  • In order to capture stronger market share and increase the customer base,MFL may pursue a strategy like is is currently doing,of offering a lower interets rate to customers than it normally does
  • Being a Systematic Important ND NBFC,MFL has restrictions on advertising it’s secured non convertible Muthoot Gold Bonds that it currently places to retail investors through it’s branch network
  • As barriers of entry are low there could be an increased level of competition as new players too enter this lucrative LAG area
  • MFL may be in contravention of Money Lending Statutes in many States…there is no clarity on this as Karnataka and Rajasthan exclude NBFCs from such statutes…but not many States….the matter is before the Supreme Court….penalties for non compliance are quite severe and will increase the cost of operations….many Statutes prescribe a cap on the lending rate…However currently RBI has not directed a ceiling on the lending rate that can be charged for Loans against Gold though it does require the Board to adopt an Interest Model that considers Cost of Funds,Margin and Risk Premium. 
However MFL continues to enjoy an excellent RONW and despite pressures on it’s Interest Spread it is expected to continue recording a good RONW of atleast 25%
IPO Recommended for Application
MFL is epected to list in May 2011 at Rs 225…this would mean a Market Capitalisation of over Rs 8300 crs…Immediate Gains are indicated at 30% on the IPO Top end price of Rs 175
Am recommending Application in the IPO of MFL because of propsects of good Immediate Gains on Listing,continuing good RONW and clear scalable growth prospects going forward and despite
  • Having frowned at the Promoters, Muthoots Intent and Mindset
  • Some cornering of shares evidenced by a coterie of Private Equity Players
  • Chances of a Poor Allotment and therefore insignificant Gains in absolute terms
  • Adverse Impact on the Interest Spread due to a host of reasons outlined above
  • Back of the Mind recall of the Suzlon (Windmills…even MFL is flirting with them) Situation…a manipulated IPO pricing and pre IPO placement and  post Listing hysteria  and the subsequent fall from grace from a market cap of Rs 50000 crs to below Rs 5000 crs and of the recent SKS Microfinance Issue…another one that squeezed shareholders while raking in huge gains for the Promoters and Private Equity Players whom offloaded pre IPO and in the IPO in a big way
  • feeling a bit squeezed like perhaps a MFL Loan Client who’s paying a High Interest on a partial Value Loan against his own Gold Jewellery instead of opting to sell it for full value !

Tend to get emotional when Promoters and Private Equity Players collude to rake in strong gains in absolute terms with low holding costs while holding out carrots to Retail Investors at a higher pricing ! 

But then putting on a Rational Hat,a sure Carrot is better than no carrot at all !…so apply and I daresay it may be wise to realise the gains and sell your small allotment as a Stag on Listing…think of it this way…its too insignificant to have kept anyway     

Cheers !

Gaurav A Parikh
98201 62597
[email protected]

A word of caution…

Investments and trading in securities carry inherent risks that rest solely with the investor or trader. We shall, therefore, not be responsible in any way for actions based on the contents herein. As per SEBI disclosure requirements, Scriptech Group, its directors, employees, associates and clients may hold long or short positions in scrips recommended for investment or disinvestment respectively.



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